What is Senior Secured Debt?

Senior secured debt sits at the top of a borrower's capital structure: first to be repaid in a default, secured by specific collateral (most commonly first-mortgage over real estate), and protected by financial covenants that the borrower must maintain.

Where NZ wholesale investors encounter it: the dominant strategy in NZ wholesale private credit is senior-secured property lending — first mortgages over commercial real estate, residential development, or land-banking transactions. First Mortgage Trust, Pallas Senior Mortgage Fund, Norfolk Mortgage Trust, Squirrel Wholesale Home Loan Fund, and Midlands Income Wholesale Fund all operate primarily in this segment.

Risk-return profile: senior secured debt is the lowest-risk debt segment per the credit waterfall — but "lowest risk" is relative. Returns typically target 6-9% per annum (gross), compared with 9-14% for mezzanine debt and 12-18% for development equity. The lower return reflects the lower risk: if the property is sold or the borrower restructures, senior lenders are paid first from sale proceeds.

LVR matters: the loan-to-value ratio (LVR) — loan amount divided by property valuation — is the primary risk measure. Senior secured property loans typically run at 55-70% LVR; lower LVR (e.g. 50%) means a deeper buffer against property value decline before lender principal is at risk. Most NZ first-mortgage funds cap maximum LVR at 65% or 75% per their IM/PDS.

Covenants: senior secured loans typically include interest-coverage ratio (ICR), debt-service coverage ratio (DSCR), and net-asset-value covenants. Breach triggers lender remedies — typically requiring the borrower to restructure, raise additional equity, or sell the asset.

Distribution to investors: in NZ wholesale credit funds, interest received from underlying loans is distributed to investors monthly or quarterly as cash, taxed at the PIR (capped at 28%) for PIE structures or at the marginal rate for LP / trust structures.